Why Do People Struggle to Understand the Economics of Car Fees?

By JAMES KENNEDY

Putting fees on driving is the right thing to do, but it’s often hard to explain to people why. Here are some reasons people struggle to understand the concept:

The matching-grant problem
Many things that drivers use are subsidized and treated as a commons. This is less progressive than it sounds because of a problem that car ownership poses: the matching-grant problem.

A matching grant means that you ante up some money, and I match it.

Matching grants aren’t inherently bad. You can encourage people to put greater effort forward by using matching grants. After all, if the recipient doesn’t push hard to raise money, the donor doesn’t have to match anything. But driving benefits are usually of a matching-grant form, but with a high stair-step barrier to entry.

If I said to you, “You bring me $10, and I’ll match it” almost everyone would take advantage. Even more so if I said, “You bring me $1, and I’ll match it.” There are a marginal number of people who don’t have this much money, but almost everyone does, and so almost everyone could benefit from such a matching grant.

But matches for driving don’t work that way. With driving, even the least expensive car is a large ante to the pot. A completely tax-free jalopy, at $2,000, is orders of magnitude more money than what some of the poorest people can afford. The fact that someone is riding around in a $2,000 jalopy also likely means that he or she has relatively low income. But a tax cut that ignores the portion of society that can’t afford a car cuts the bottomstep of society out of the benefit system.

A lot of what drivers aren’t paying for in the road system is unnecessary. More than 50 percent of road expenditures go to expansions of roads, rather than maintenance. Interestingly enough, drivers pay for about half of road costs through gas taxes and other user fees. If we cut out the unnecessary road expansions, we could probably get drivers back to where they were paying for 100 percent of costs without necessarily increasing their taxation.

But people hear “free thing” and they don’t think about the matching-grant issues. People are also unaware of how the road system is expanding faster than we can pay for it. And they don’t understand how that affects their fees.

An unfair tax cut
Cutting the car tax in Providence has been presented as being about helping the poorest, but it’s not. The tax cut raises the exemption for the car tax to $2,000 from $1,000, which means that every car in the city gets an equal $60 tax cut. If you car is a Mercedes, you get $60. If your car is the three-wheeled Mr. Bean mobile, you get $60. If you have six cars, you get $360. If you have zero cars, you get nothing.

A lot of people struggle to pay the car tax, but reducing the car tax is an inefficient way to help poor people, because it excludes a lot of poor people, and helps a lot of rich people. The tax cut sounds like it would affect only the lowest rung of car owners, but that exemption change actually carries through to everyone who owns a car, which is fairly regressive.

Some people have written me to say that the reason they don’t want non-drivers to get an equal $60 tax is that drivers are the only people who paid a tax in the first place. Why should people who never paid in get free money back?

This conceives of roads as naturally occurring phenomena that never had to be built and will never have to be maintained, and the car tax as a “gotchya” tax intended to cordon off these wild roads and charge people for them. But obviously that’s not really what’s happening. Roads cost a lot. Providence’s last basic repaving bond was $40 million — city streets are actually relatively inexpensive compared to some state and federally maintained roads, which can run in the 10-figure range for small segments of road.

Expecting a cut to the car tax when the city has trouble paying for paving isn’t like reclaiming money that was taken from you. As a driver, you consumed something. You’re at a restaurant, having consumed $100 worth of stuff, and you’re only paying half the bill. The other people who haven’t eaten anything yet want to know if they can half off their bills, too.

The stuff that is consumed — in government services — by people who don’t own cars is much less expensive. Yeah, it’s true that transit gets a subsidy, but so does driving. Except that oftentimes, the things which hobble transit from being efficient are those things that were built into our land use or tax system to benefit driving.

Under the federal tax code, you can take $130 a month in tax write-offs for transit, but more the $300 a month for parking — of course, if you’re poor and you take transit, your income doesn’t even qualify for these write-offs.

You can write off you car on your taxes. You can’t write off your bike, or your walking shoes. The zoning code creates a land-use pattern that rewards driving as well. And at the end of the day, drivers only pay 50 cents on the dollar for road maintenance, all while the road system continually expands.

And the people who don’t drive in the city are among the poorest. Yes, this isn’t true on an individual-to-individual level. There may be a handful of lawyers living in downtown who don’t own cars. But overwhelmingly, those who don’t own cars are the poorest. Twenty-five percent of Providence households don’t have a car, and for less wealthy neighborhoods such as Olneyville, that number increase to nearly 50 percent.

Fungibility
So, if the goal of the car-tax reduction is to give people an extra $60, why not just do that? The design of the car-tax cut means that even people with really nice cars get the money, while people without them get nothing. Why not target a different tax so that people can get a $60 that includes people who don’t drive? This would still give $60 to people who do drive.

Human beings don’t naturally think in fungible units.

What the heck is fungibility? It’s like the transitive property for money: 2+5=7 and 5+2 is also 7. You change the order, but the amounts involved are equal.
Still lost? If I give you money, you can spend it on whatever you want. If I take a dollar from you one place, and give you a dollar in another, I’ve left you at the same point as you were. That’s fungibility.

There’s a reason we don’t like to think of things as fungible. It messes up our sense of being a family. You ever see someone take a check out at the end of Thanksgiving dinner to pay for the turkey? Even though paying someone for what they’ve provided you would seem like a nice enough thing to do, it makes the exchange of goods naked to everyone. In family and friend situations, we don’t want that to be the case. It’s not even necessarily that we don’t want to exchange with one another. We just don’t want the exchange to be easily counted.

Have you had a potluck? You’re implicitly telling your friends that you’re not going to feed them, and that you’d like them to pitch in. No one finds this weird. But if you made a big meal and charged people for it, they would — even if they got a better deal on it than if they’d brought their own dish.

For better or worse, a lot of us conceive of government the way that we do of family. For conservatives, family is a strong, stern father. For liberals, government is a nurturing mother — apologies for the dumb gender stereotypes. Telling people you’re going to trade them one tax for another short-circuits our rational thinking. We feel like someone tried to write a check for the turkey.

Something in people’s heads just clicks, and people hear, “I’m paying $60 more for my car.” It doesn’t matter that they’d literally get the same $60 back somewhere else. Something about many people’s brains doesn’t let them add up pluses and minuses and say that they’re equal. I think this familial pattern is why people have a hard time with this.

If we do cut the car tax, we should match it with a high tax on parking lots and garages. We should continue to add parking meters to the street in places where demand for parking is high enough to require them.

The parking lot and garage tax
Parking in cities is an oligopoly. Because there’s only so much space for garages or lots, the people who own the lots are in a relatively uncompetitive market. It makes sense as a land speculator to hold onto a parking lot, because it’s a virtual cash cow: in return for paying a low property tax and employing one person to sit in a booth all day, the parking lot owner gets to reap the reward of commuters coming in and out. Someday, perhaps far in the future, a perfect deal will arrive, and only on that day will the parking lot disappear. There’s no incentive for the parking-lot owner to build something modest in the meantime. That would have a higher tax rate and a lower profit return.

Because parking is already being sold at the highest price the market will bear, and because no one can come into that market to compete the price down, the best thing to do is to tax parking. The lot and garage owners can’t pass the price of the tax on without losing customers.

People who own parking aren’t dumb: they’ll try to minimize their taxes, and maximize their returns. But what that means in practice is good for the city. A lot owner who wants to escape the tax has to either short-sell his or her land to someone willing to develop something, or develop something themselves. Either of these would create infill, a new tax-base to replace the lost parking-tax revenue, and a land use that is more conducive to not driving.

A parking lot and garage tax could be fully refunded to other businesses. This would mean lower property or commercial taxes, which would also create a virtuous cycle. The alternative in the tax code is to raise more revenue from these taxes, or to raise the meal and beverage tax — which is already proposed in Mayor Elorza’s budget. Why tax restaurants when you can tax parking?

Meters that people will ask for
Parking meters haven’t been a popular item on the mayor’s agenda. The way to change that is to share the meter money.

Cities that have successfully implemented meter programs have always shared the full proceeds of the meters with the neighborhoods that get metered. That means the city loses revenue, but it also means that business or resident districts get money they can use to do things the city might have been on the hook to do before: plant trees, fix sidewalks, throw festivals, etc.

Free fall
You don’t know you’re in free fall, because it feels like flying. Gravity doesn’t seem to apply. Astronauts train for space in free fall, and, in fact, the “gravity free” experience in space is a form of free fall, as space stations move just fast enough to stay in constant free fall around the Earth.

But having a car-centered society is more like free fall than it is like flying. We subsidize costs for poor people that we know will pay off not just for them, but for society. Paying for education for everyone in the society is an investment in the future. Paying for everyone to have health care would be. Even handing people money, as in the Earned Income Tax Credit, is a good investment.

But paying for a society that is car-centric isn’t like that at all. All of the varying issues, like the matching-grant problem, prevent that from being truly progressive in its income redistribution. But to the extent that we encourage driving as the first and sole method of getting around, we require more and more public expenditures for roads, we ensure that our downtowns will be destroyed for parking, and that our businesses and residents will be overtaxed. We also create health and environmental problems on top of those fiscal ones.

So as much as charging less for driving sounds like a great deal, it’s not.

Providence resident James Kennedy runs the blog Transport Providence.